The internet shopping revolution claimed its first big high-street scalp yesterday when the boss of HMV and Waterstone's quit as the group blamed the combined power of online retailers and the supermarkets for plummeting sales.

Alan Giles handed in his notice after unveiling the worst Christmas trading figures of any big UK retailer so far, particularly at the HMV chain. He said there had been "a quantum jump" in online sales in recent months, while the supermarkets - especially Tesco and Asda - had once again turned the screw on price. The rise in popularity of music downloads has also undermined the traditional high-street music retail business.

HMV's 200 music stores in Britain, which date back to 1921, slumped £300,000 into the red in the six months to the end of October. During the same period in 2004 they made a profit of £13.5m. Underlying sales were down 12%. Over Christmas - when HMV makes 90% of its profits - the sales decline slowed, but it was still nearly 9%.

Mr Giles, a music fan whose tastes range from Cream to Kasabian, initially dismissed downloading as posing little threat to his business. When the pirate site Napster emerged the HMV chief executive insisted it was not a lot different from teenagers borrowing albums to tape in the 70s. It would, he said, give them a love of music which would ultimately translate into higher CD sales.

"A year ago I was saying the internet would plateau at about 10% of this market," he admitted yesterday. "Now I say that I was wrong. I just don't know now how far it will go. This is a brave new world for retailers." He said he wanted a career change and did not intend to take another full-time job.

HMV has been widely criticised for failing to embrace the internet early enough. It launched a download site only in autumn and, while its Guernsey-based online store is growing fast, it is smaller than one of the chain's Oxford Street stores.

The chain has been battered by the supermarkets, which now dominate sales of chart CDs and bestselling books. The grocers slash prices but make profits as a result of huge sales volumes. HMV matched those prices, but its profit margins, which have to support expensive high-street outlets, have been shredded.

At first HMV held its own by concentrating on back catalogue ranges which the grocers do not stock. Now, however, online retailers, led by sites such as Amazon and Play.com, have moved in on that part of the business.

Stuart Rowe, the managing director of online Play.com, said the internet was now the mass market. Play.com is the second largest online entertainment retailer after Amazon and its Christmas sales were a sharp contrast to HMV's: music sales were up 37%, DVDs up 8% and video games 50%. "This is the first year that internet has been mass market," said Mr Rowe, who until last year was head of HMV's online business.

"This Christmas has been the turning point and now it will just grow and grow. Two or three years ago online shoppers were early adopters, but now they are people who realise it is just a more comfortable way of shopping and checking prices. People have become more comfortable with technology now they use Sky+, eBay and broadband."

The bookselling business is fraught with many of the same problems. Waterstone's six-month same store sales were down 6.4%. The competition was demonstrated last summer when the sixth Harry Potter volume was published. While its cover price was £16.99, both Waterstone's and the rival high-street chain Ottakars were selling it for £11.99 - but they sold tens of thousands fewer copies than anticipated after they were undercut by supermarkets. The Kwik Save discount chain priced it at just £4.99.

Mr Giles's answer was to mount a takeover for Ottakars. But authors and publishers mounted a vocal campaign against the deal - which would have given HMV nearly a quarter of the books market - insisting it would mean less choice in bookshops and lower royalties for writers. At one point, the playwright Alan Bennett urged readers not to buy his new book, Untold Stories, from Waterstone's.